U.S. and Hong Kong (2009)
United States Department of State
Bureau of International Narcotics and Law Enforcement Affairs
2009 International Narcotics Control Strategy Report (INCSR)
February 27, 2009
Volume II: Money Laundering and Financial Crimes
March 2009
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Country Reports
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Hong Kong
Hong Kong is a major international financial center. Its low taxes and simplified tax system, sophisticated banking system, shell company formation agents, and the absence of currency and exchange controls facilitate financial activity but also make Hong Kong vulnerable to money laundering. The Hong Kong Special Administrative Region Government (HKSARG) considers the primary sources of laundered funds to be corruption (both foreign and domestic), tax evasion, fraud, illegal gambling and bookmaking, prostitution, loan sharking, commercial crimes, and intellectual property rights infringement. Laundering channels include Hong Kong's banking system, legitimate and underground remittance and money transfer networks, trade-based money laundering, and large-ticket consumer purchases--such as property, gold and jewelry. The proceeds from narcotics trafficking are believed to be only a small percentage of illicit proceeds laundered.
Hong Kong is a free port. As such, there is no significant black market for smuggled goods. According to Hong Kong law enforcement authorities, there is no evidence to suggest smuggling activities in Hong Kong are funded by narcotics proceeds.
Hong Kong has investigated and prosecuted very few money laundering cases involving fund movements outside the formal banking sector. The formal banking sector appears to be the primary means by which criminals attempt to launder funds in Hong Kong. Over the past four years, reported financial crimes have increased. Hong Kong police reported 4,758 (2006) and 4,745 (2007) cases of Deception; Business Fraud cases totaled 34 (2006) and 27 (2007); Forgery and Coinage cases reported totaled 1,149 (2006) and 1,195 (2007). Hong Kong does not keep separate statistics on cases involving U.S. currency. The government expects the current economic downturn to lead to increased financial crime and is tightening its supervision of the banking system.
Hong Kong does not make a distinction between onshore and offshore entities, including banks. Its financial regulatory regimes are applicable to residents and nonresidents alike. No differential treatment is provided for nonresidents, including with respect to taxation and exchange controls. The Hong Kong Monetary Authority (HKMA) regulates banks. The Office of Commissioner of Insurance (OCI) and the Securities and Futures Commission (SFC) regulate insurance and securities firms, respectively. All three impose licensing requirements and screen business applicants. There are no legal casinos or Internet gambling sites in Hong Kong.
In Hong Kong, it is not uncommon to use solicitors and accountants, acting as company formation agents, to set up shell or nominee entities to conceal ownership of accounts and assets. Many of the more than 500,000 international business companies (IBCs) registered in Hong Kong are established with nominee directors; and many are owned by other IBCs registered in the British Virgin Islands. However, all companies are required to file certain information on an annual basis with the Companies Registry, including annual accounts, details of registered offices, directors, the company secretary, charges, a register of members and debenture holders (depending on the category of companies to which a company belongs). In addition, these companies are subject to additional regulatory controls if they engage in certain business activities. For example, if a company carries out banking/securities/insurance business, it must conduct customer due diligence on all corporate entities and trust arrangements, in particular, identifying their beneficial owners for the purpose of complying with the AML/CTF requirements of the HKMA, SFC, and/or OCI. The AML/CTF guidelines published by these three regulators require companies to have procedures in place to monitor the identity of all principal shareholders, directors, account signatories and the beneficial owner of the corporate customer. Bearer shares are not permitted for companies registered in Hong Kong.
Money laundering is a criminal offense in Hong Kong under the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRoP) and the Organized and Serious Crimes Ordinance (OSCO). The two ordinances provide for the tracing, restraint and confiscation of proceeds derived from drug trafficking and other serious crimes. The legislation also criminalizes the act of dealing with property while knowing or having reasonable grounds to believe that such property represents proceeds of drug trafficking and other indictable offenses. The money laundering offense extends to the proceeds of drug-related and other indictable crimes. Money laundering is punishable by up to 14 years' imprisonment and a fine of HK $5,000,000 (approximately U.S. $641,000). Hong Kong enacted the United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) (Cap. 575) in 2002 to criminalize terrorism and terrorist financing. UNATMO was amended in 2004 to allow Hong Kong to freeze the nonfund property of terrorists and terrorist organizations.
Money laundering ordinances apply to covered institutions--including banks and nonbank financial institutions--as well as to intermediaries such as lawyers and accountants. All persons must report suspicious transactions of any amount to the Joint Financial Intelligence Unit (JFIU). There is no minimum threshold that compels reporting. The JFIU does not investigate suspicious transactions itself but receives, stores, and disseminates suspicious transactions reports (STRs) to the appropriate investigative unit. Typically, STRs are passed to the Narcotics Bureau, the Organized Crime and Triad Bureau of the Hong Kong Police Force, or to the Customs Drug Investigation Bureau of the Hong Kong Customs and Excise Department. No laws in Hong Kong contain secrecy provisions that prohibit authorized institutions from disclosing client and ownership information to the HKMA and the law enforcement agencies.
Financial regulatory authorities have issued anti-money laundering guidelines reflecting the revised FATF Forty Recommendations on Money Laundering to institutions under their purview and monitor compliance through on-site inspections and other means. The HKMA is responsible for supervising and examining compliance of financial institutions that are authorized under Hong Kong's Banking Ordinance. The SFC is responsible for supervising and examining compliance of persons that are licensed by the SFC to conduct business in regulated activities, as defined in Schedule 5 of the Securities and Futures Ordinance. The OCI is responsible for supervising and examining compliance of insurance institutions. Hong Kong law enforcement agencies provide training and feedback on suspicious transaction reporting.
Financial institutions are required to know and record the identities of their customers and maintain records for five to seven years. The filing of a suspicious transaction report cannot be considered a breach of any restrictions on the disclosure of information imposed by contract or law. Remittance agents and moneychangers must register their businesses with the police and keep customer identification and transaction records for cash transactions above a legal threshold for at least six years. An HKMA directive reduced this threshold amount from HK $20,000 (approximately U.S. $2,565) to HK $8,000 (approximately U.S. $1,000), effective January 1, 2007.
Hong Kong does not require reporting of the movement of any amount of currency across its borders, or of large currency transactions above any threshold level. Hong Kong is examining the effectiveness of its existing regime in interdicting illicit cross border cash couriering activities. Reportedly, Hong Kong is deliberating ways of complying with FATF Special Recommendation Nine but does not intend to put in place a "declaration system" and is instead considering a disclosure-based system. Law enforcement agents in Hong Kong are already empowered to seize criminal proceeds anywhere in the jurisdiction, including at the border.
Designated Non-Financial Businesses and Professions as defined by FATF (i.e. lawyers, accountants, estate agents, trust and company service providers and dealers in precious stones and metals) are not subject to specific statutory AML/CTF requirements. However, under the DTROP, the OSCO and the UNATMO, suspicious transaction reporting requirements are applicable to all persons. Lawyers, accountants, practitioners in nonfinancial institutions, dealers in precious stones and precious metals are all obliged by law, as are all persons, to make a suspicious transaction report to the JFIU if they come across any property known or suspected to be proceeds of drug trafficking, crimes, or terrorism. Under the DTROP, the OSCO and the UNATMO, all persons are required to report his/her knowledge or suspicion of crime proceeds or terrorist property; failure to report such suspicion or knowledge is a criminal offense. The reporting requirement exists irrespective of the value of the proceeds or property, and the circumstances by which the person comes across such knowledge or suspicion.
In addition, the professional bodies or regulators of Hong Kong lawyers, accountants, estate agents, trust and company service providers have issued AML/CTF guidelines and encourage their members to comply. During 2008, the Narcotics Division of the Hong Kong Security Bureau and the JFIU have conducted regular outreach and capacity building programs for these sectors including seminars, guidelines, leaflets and Announcements in the Public Interest on television and radio.
Hong Kong's open financial system has long made it the primary conduit for funds transferred out of China. Hong Kong's role has been evolving as China's financial system gradually opens. On February 25, 2004, Hong Kong banks began to offer Chinese currency-based (renminbi or RMB) deposit, exchange, and remittance services. Later that year, Hong Kong banks began to issue RMB-based credit cards, which could be used both in Mainland China and in Hong Kong shops that had enrolled in the Chinese payments system, China Union Pay. In November 2005, Hong Kong banks were permitted modest increases in the scope of RMB business they can offer clients. The new provisions raised daily limits to 20,000 RMB (approximately $3000) and expanded services. This change brought many financial transactions related to China out of the money-transfer industry and into the more highly regulated banking industry, which is better equipped to guard against money laundering.
Despite Hong Kong's efforts to encourage capital shifts to the banking industry, Chinese capital controls continue to encourage entities in both Hong Kong and Mainland China to use underground financial systems to avoid Chinese restrictions on currency exchange. A well-publicized June 2007 raid by Chinese police on an underground bank in Shenzhen resulted in the detention of six suspects, including a Hong Kong-based businesswoman, accused of facilitating the transfer of RMB 4.3 billion (approximately. $570 million) out of China since the beginning of 2006--including transfers by Chinese state-owned enterprises. Authorities believe the majority of these funds were used to purchase properties and stocks in Hong Kong. Media reports indicated that such underground exchange houses are rampant in Guangdong province and have transferred more than RMB 200 billion (U.S. $26.7 billion) out of China since 2006. While Chinese police action in late 2007 appears to have dealt a blow to underground banking systems, the lack of strong Hong Kong government oversight of moneychangers and remittance agents was highlighted in the FATF/APG Mutual Evaluation Report, published in June 2008. The global economic slowdown and a dramatic drop in Hong Kong housing and equity prices are likely to have contributed as much to declining crossborder flows as to stricter enforcement on the part of the Chinese and Hong Kong authorities.
To facilitate effective processing of suspicious transaction reports, the Joint Financial Investigation Unit (JFIU), staffed by the HKP and Customs and Excise Department, has been in operation since 1989. It collects and processes suspicious transaction reports, analyzes the information contained therein, and disseminates the reports to the appropriate law enforcement units for further investigation. The JFIU also conducts research on money laundering trends and methods and provides case examples (typologies) to financial and nonfinancial institutions to assist them in identifying suspicious transactions. The JFIU has no regulatory responsibilities.
The Hong Kong JFIU is housed in a separate, secure area in the Narcotics Bureau within the Police Headquarters Complex. It is treated as a separate unit and acts independently from other police units in order to preserve its autonomy and independence. While the JFIU is considered a separate and distinct unit, it does not have any independent or devolved budget. Day-to-day operating costs are met from the budgets of the Police and Customs and Excise Departments. JFIU receives disclosures, conducts analysis on them, and in suitable cases distributes them to investigation units. JFIU can distribute cases to all Hong Kong law enforcement agencies, similar overseas bodies and in certain circumstances regulatory bodies in Hong Kong.
The JFIU has direct access to the records and databases maintained within the Police and Customs and Excise Departments. It also has direct access to the databases of the Transport Department, the Companies Registry and the Land Registry. Access to records maintained by other government agencies can be granted upon JFIU's written request and in the case of the tax authority, a court order. Financial institutions are obligated to provide the JFIU with any information relating to a suspicious transaction that it has reported. However, the JFIU does not have access to the databases of financial institutions. If more detailed information is required in respect of suspicious transaction reports, the financial institution must be formally subpoenaed. Section 12(6) of the UNATMO and Sections 25A (9) of both the DTROP and the OSCO allow for the dissemination of information to domestic and foreign agencies to combat crime and terrorism. Hong Kong legislation does not require JFIU to enter into MOUs with overseas counterparts for the purpose of information exchange. Up to the end of October 2008, the JFIU had received 12,560 STRs in 2008, of which 2,101 had been referred to law enforcement agencies for further investigation. Since 1994, when OSCO first mandated the filing of suspicious transaction reports (STRs), the number of STRs received by JFIU has generally increased. In the first nine months of 2007, 12,308 STRs were filed, of which 1798 were referred to law enforcement agencies.
The Hong Kong Police have a number of dedicated units responsible for investigating financial crime. The Commercial Crime Bureau and Narcotics Bureau are the primary units responsible for investigating money laundering and terrorist financing cases. Serious Crimes Squads in Police Districts are responsible for investigating less serious financial crimes. Resources and training are adequate for their current mission. The Independent Commission Against Commission (ICAC) investigates money laundering cases related to corruption while the Financial Investigation Group (FIG) of the Customs and Excise Department is responsible for money laundering investigations related to drug trafficking and organized crime.
As of the end of September 2008, Hong Kong law enforcement agencies had prosecuted 267 persons for financial crimes. However, the HKP has not reported any financially significant cases during 2008. Hong Kong Customs and Excise reported two arrests and one prosecution for money laundering since January 1, 2008.
Under the DTRoP and the OSCO, a court may issue a restraining order against a defendant's property at or near the time criminal proceedings are instituted. Property includes money, goods, real property, and instruments of crime. A court may issue confiscation orders at the value of a defendant's proceeds from illicit activities. Cash imported into or exported from Hong Kong that is connected to narcotics trafficking may be seized, and a court may order its forfeiture. Legitimate businesses can be seized if the business is the "realizable property" of a defendant. Realizable property is defined under the DTRoP and OSCO as any property held by the defendant, any property held by a person to whom the defendant has directly or indirectly made a gift, or any property that is subject to the effective control of the defendant. The Secretary of Justice is responsible for the legal procedures involved in restraining and confiscating assets. There is no time frame ascribed to freezing drug proceeds or the proceeds of other crimes. Regarding terrorist property, a formal application for forfeiture must be made within two years of freezing. Confiscated or forfeited assets and proceeds are paid into general government revenue.
In July 2002, the legislature passed several amendments to the DTRoP and OSCO to strengthen restraint and confiscation provisions. These changes, effective January 1, 2003, lowered the evidentiary threshold for initiating confiscation and restraint orders against persons or properties suspected of drug trafficking, eliminated the requirement of actual notice to an absconded offender, eliminated the requirement that the court fix a period of time in which a defendant is required to pay a confiscation judgment, authorized courts to issue restraining orders against assets upon arrest rather than charging, required the holder of property to produce documents and otherwise assist the government in assessing the value of the property, and created an assumption under the DTRoP (to make it consistent with OSCO) that property held within six years of the violation by a person convicted of drug money laundering constitutes proceeds from that money laundering.
Hong Kong normally confiscates crime proceeds only after conviction in a court of law. However, the court may allow property seized on being imported into Hong Kong to be forfeited, if it is satisfied that such property is related to drug trafficking. The court may, on an application by the Secretary for Justice, order the forfeiture of terrorist property. An order may be made under either of these provisions independent of any criminal proceedings with which the property concerned is connected. The civil standard of proof applies in these proceedings. There are provisions under DTROP and OSCO to trace, seize and freeze assets without undue delay. The system for freezing and forfeiture of terrorist property is provided for under the UNATMO.
The year-end running balance for assets frozen and seized and the accumulative amounts of assets forfeited with reference to narcotics-related (DTROP) and criminal-related (OSCO) offenses for the past five years are provided below. There is a progressive increase in the confiscation for criminal-related offenses, reflecting additional efforts made by Hong Kong law enforcement agencies. No terrorist-related assets have been frozen, seized, and/or forfeited. Banks and other financial institutions cooperate with law enforcement efforts to seize or freeze bank accounts. According to JFIU figures as of September 30, 2008, the value of assets under restraint (pending confiscation proceedings) was $306.42 million, and the value of assets under a court confiscation order but not yet paid to the government was $10.07 million. JFIU also reported that, as of September 30, 2008, $58.44 million had been confiscated and paid to the government since the enactment of DTRoP and OSCO. The value of assets under restraint (pending confiscation proceedings) for 2007 was $265.44 million. The value of assets under a court confiscation order but not yet paid to the government was $10.96 million in 2007. The value of assets confiscated and paid to the government in 2007 was $56.18 million. No figures were available for 2008. Hong Kong has shared confiscated assets with the United States.
On July 3, 2004, the Legislative Council passed the United Nations (Anti-Terrorism Measures) (Amendment) Ordinance. This law is intended to implement UNSCR 1373 and the FATF Special Eight Recommendations on Terrorist Financing in place in July 2004. It extends the HKSARG's freezing power beyond funds to the property of terrorists and terrorist organizations. It also criminalizes the provision or collection of funds by a person intending or knowing that the funds will be used in whole or in part to commit terrorist acts. Hong Kong's financial regulatory authorities have directed the institutions they supervise to conduct record searches for assets of suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee's consolidated list and the list of Specially Designated Global Terrorists designated by the United States pursuant to E.O. 13224. There has been no legislation to comport with special Recommendation Nine on cash couriers.
To help deal with anti-money laundering (AML) issues from a practical perspective and reflect business needs, the Hong Kong Monetary Authority (HKMA) established an Industry Working Group on AML. Three subgroups have been established to share experiences and consider the way forward on issues such as politically exposed persons (PEPs), terrorist financing, transaction monitoring systems and private banking issues. The subgroup on Customer Due Diligence (CDD) issued guidelines on issues related to PEPs in November 2007. The HKMA has also implemented a number of initiatives on AML issues, including issuing circulars and guidance to authorized institutions on combating the financing of weapons of mass destruction conducting in-depth examinations of institutions' AML controls and setting out best practices for AML in high-risk areas--such as correspondent banking, private banking, and remittance. However, Hong Kong's 2008 FATF/APG Mutual Evaluation pointed to lack of sufficient oversight of informal financial entities, including remittance agents and money changers. Hong Kong authorities are expected to submit a proposal in early 2009 to increase supervision of these entities.
The HKMA circulated guidelines that require banks to maintain a database of terrorist names and management information systems to detect unusual patterns of activity in customer accounts. The SFC and the OCI circulated guidance notes in 2005 that provided additional guidance on CDD and other issues, reflecting the new requirements in the Revised FATF Forty Recommendations on Money Laundering and Special Recommendations on Terrorist Financing. In 2006, the OCI and the SFC revised their guidance notes to take into account the latest recommendations by the FATF. There are no special provisions in Hong Kong law to monitor the financial activities of charitable or nonprofit agencies.
Other bodies governing segments of the financial sector are also engaged in advancing anti-money laundering efforts. The Hong Kong Estates Agents Authority, for instance, has drawn up specific guidelines for real estate agents on filing suspicious transaction reports; and the Law Society of Hong Kong and the Hong Kong Institute of Certified Public Accountants are in the process of drafting such guidance for their members.
Hong Kong is an active member of the Financial Action Task Force's FATF and Offshore Group of Banking Supervisors and was a founding member of the Asia Pacific Group on Money Laundering (APG).
In November 2007, the APG and FATF conducted a site visit as part of their joint mutual evaluation of Hong Kong. The report, which was discussed at FATF's June 2008 Plenary meeting, praised Hong Kong's AML and CTR regime but identified a lack of oversight for remittance agents and money changers, and the designated nonfinancial business and professions such as accountants and lawyers, the lack of statutory backing for customer due diligence and record keeping requirements for financial institutions, and gaps in Hong Kong's legal framework to fully implement the United Nations Terrorist Financing Convention. Hong Kong is required to submit a report on its progress toward addressing these deficiencies in June 2010. Hong Kong plans to conduct a comprehensive review of its legal and regulatory regime and introduce specific measures to improve its ability to prevent, detect, investigate, enforce and prosecute money laundering and terrorist financing activities. The initial phase of the review will focus on the AML/CTF regulatory regime for the financial services sectors. Consultation with the concerned sectors is expected to follow publication of concrete proposals early in 2009. To ensure that the AML/CTF measures do not conflict with policies to promote Hong Kong as an international financial centre, the Financial Services and the Treasury Bureau has taken over from the Security Bureau the overall coordinating role for AML/CTF policies within the Administration, beginning in October 2008.
The People's Republic of China (PRC) represents Hong Kong on defense and foreign policy matters, including UN affairs. Through the PRC, the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, the UN Convention against Corruption, and the UN International Convention for the Suppression of the Financing of Terrorism are all applicable to Hong Kong.
Hong Kong's banking supervisory framework is in line with the requirements of the Basel Committee on Banking Supervision's "Core Principles for Effective Banking Supervision." Hong Kong's JFIU is a member of the Egmont Group and is able to share information with its international counterparts. Hong Kong is known to cooperate with foreign jurisdictions in combating money laundering.
Hong Kong's mutual legal assistance agreements generally provide for asset tracing, seizure, and sharing. Hong Kong signed and ratified a mutual legal assistance agreement (MLAA) with the United States that came into force in January 2000. Hong Kong has MLAAs with 25 other jurisdictions. Hong Kong has also signed surrender-of-fugitive-offenders (extradition) agreements with 17 countries, including the United States, and has signed agreements for the transfer of sentenced persons with ten countries, also including the United States. Hong Kong authorities exchange information on an informal basis with overseas counterparts and with Interpol. Apart from exchange of intelligence and other information permissible at the law enforcement level, documentary evidence may also be provided pursuant to money laundering and terrorist financing investigations or proceedings pursuant to requests made under the operative agreement with the United States on mutual legal assistance. Hong Kong provides similar assistance to jurisdictions that have operative bilateral or multilateral agreements with United States or on the basis of reciprocity under the MLAA.
In 2008, Hong Kong Customs conducted two successful joint operations with the U.S. Drug Enforcement Agency (USDEA) and U.S. Immigration and Customs Enforcement (USICE). For the joint operation with DEA, crime proceeds of approximately HKD 8 million held by the key member of a drug-related money-laundering syndicate was restrained under the MLAA in Hong Kong in August 2008. The arrested person was eventually extradited to the United States in October 2008. For the joint operation with USICE, a subject from Taiwan was successfully extradited to the United State in August 2008. ICAC has responded to a Letter of Request regarding a corruption case involving a principal official of the Macau SAR for the production of bank records.
The Government of Hong Kong should further strengthen its anti-money laundering/counterterrorist financing regime by requiring more stringent customer due diligence and record keeping requirements for financial institutions; mandating more suspicious transaction reporting by lawyers and accountants, as well as by business establishments, such as auto dealerships, real estate companies, and jewelry stores; establishing threshold reporting requirements for currency transactions; and putting into place "structuring" provisions to counterevasion efforts. Hong Kong should institute mandatory oversight for remittance agents and money changers, and the designated nonfinancial business and professions such as accountants and lawyers. It should also establish mandatory cross-border currency reporting requirements and address trade-based money laundering, as well as monitor the financial activities of charitable or nonprofit agencies. Hong Kong should also take steps to stop the use of "shell" companies, IBCs, and other mechanisms that conceal the beneficial ownership of accounts by more closely regulating corporate formation agents.
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Key Government Documents
U.S. and Hong Kong
